As yields soar, NABARD scraps Rs 5,000-crore bond issue, HDFC gets tepid response

Soaring yields and high volatility in the bond market are deterring companies from scheduled fundraising plans.

National Bank for Agriculture and Rural Development (NABARD) on May 25 cancelled a planned Rs 5,000-crore primary three-year bond sale citing higher coupon bids, said at least three money market participants. None of them agreed to be identified saying they are not authorised to speak to the media.

Also, mortgage lender Housing Development Finance Corporation (HDFC) received a tepid response for its Rs 12,000-crore issue on May 24, being able to raise only Rs 7,743 crore from the bond market. The 10-year issue was at an annual coupon of 7.86 percent.

RBI cues spooks markets

The rate-setting monetary policy committee (MPC) of the Reserve Bank of India (RBI) in an off-cycle meeting on May 4 hiked the repo rate by 40 basis points (bps) due to concerns of high inflation. Jayanth Varma, a member of the panel, had said the MPC may have to raise rates by around 100 bps “very soon”.

Government bond yields jumped following the rate hike, with the 10-year yield spiking to a three-year high of 7.49 percent on May 9. However, most banks did not raise their Marginal Cost of Fund-based Lending Rate (MCLR) by that amount, which entices borrowers towards bank loans rather than the debt market.

Corporate bond yields move in line with government bond yields. However, corporates have to pay a higher premium to investors for their investments given the higher risk involved. This difference between the two is called the “spread”. Money market experts said that the spread between corporate bonds and government securities is not very attractive at current levels, which is why investors are choosing to stay away. This has also deterred banks and NBFCs from tapping the debt market.

“Spreads between corporate bonds and government securities are below the historical average due to ample liquidity in the system and low corporate bond issuance post TLTRO (targeted long-term repo operations),” said Sanjay Pawar, fund manager (fixed income) at LIC Mutual Fund Asset Management.

Chances of the spread moving to the historical average looks “bleak” as corporate bond supply is likely to be low, Pawar said. Large issuers may not borrow as stated in their budgets, he added.

Uneasiness in corporate debt market

Issuers of corporate bonds are also seeking clarity on where interest rates are headed vis-a-vis inflation. In an interview to CNBC-TV18 on May 23, RBI governor Shaktikanta Das had said that another repo rate hike in the next meeting was “a no-brainer”. Das had also said that the recently announced fiscal measures, which includes an excise duty cut on petrol and diesel, will have a “sobering impact” on inflation going forward.

Economists have said that the fiscal measures could possibly lower inflation in the coming months, but would not hold back the MPC from raising interest rates. Barclays expects the MPC to raise the repo rate by 50 bps next month.

“The corporate debt market is still wary of higher rates and is choosing to delay fundraising,” said Raju Sharma, chief investment officer, debt, at IDBI Mutual Fund. “Most of the companies have borrowed funds at a lower interest rate in the past two years and, hence, may want to wait for the market to stabilise.”

“The 10-year government bond yield is very sensitive currently — it can fluctuate in a wide range of 7.10 percent to 7.45 percent, depending on the news flow. This, coupled with a possibility of a rate hike in June, has probably kept issuers at bay,” Sharma added.

Lull ahead in bond market?

According to money market experts, corporate bond issues of banks and NBFCs are likely to stay subdued till bond yield spreads adjust, clarity on interest rates emerges and investor demand returns. Any immediate fund requirement can be tackled through commercial paper or a certificate of deposit, they added.

“The fiscal measures are likely to taper down inflation and may not warrant aggressive rate hikes. That may be clear in the June policy,” said JM Financial’s Manglunia.

“Although the next rate hike is priced in, issuers would want to get a clear picture on where rates are headed and how aggressive the monetary policy action will be,” he added.

LIC Mutual Fund Asset Management’s Pawar said that major bond issuances will only pick up from the second half of this financial year when festive season demand emerges and as issuers’ expectations are in sync with investors’ demands. The investor community will also have some more clarity on future RBI actions, he said.